Executive Life Plan May Erode Value for Some Policyholders


Some customers of Executive Life Insurance Co. may find the cash values of their policies seriously eroded under the rehabilitation plan recently proposed by Insurance Commissioner John Garamendi, some insurance agents maintain.

Last month, Garamendi revealed a plan to sell Executive Life to a consortium of French insurers for $3 billion. The sale and a proposed agreement with state guaranty funds to make up losses should net the bulk of the company's policyholders 100 cents on the dollar, he said.

But general agents, who studied the details of the rehabilitation plan, say some Executive Life customers could get much less than promised. They say the 185,000 holders or annual premium whole life policies will have to pay significantly increased fees for diminishing rates of return.

In the end, many--especially those who are young and healthy--may be better off cashing in their policies now, despite hefty surrender fees designed to discourage such bailouts.

"A person may have much more money if he bailed out immediately than if he stays in for the next five years," said Marty Greenberg, president of Total Financial and Insurance Services in Encino. "There are plenty of agents who are advising their clients to walk as soon as the deal is done. Others are saying, 'Stay and see what happens.' "

Although Garamendi has won praise from many consumers and agents for his swift response to the Executive Life debacle, these agents believe that the deal gives MAAF, the French insurer that is leading the Executive Life buyout, too much leeway.

The deal allows the company to raise annual premiums that pay for death benefits by 15% while simultaneously reducing promised rates of return to less than 7%. Additionally, those who have borrowed against their policies could find their loan rates rising sharply, Michael Flynn, an Encino insurance agent, said in an open letter to Garamendi and other insurance agents.

"The only way to 'win' is to die before the extended time runs out," Flynn complained.

The proposed rehabilitation plan guarantees policyholders' death benefits.

Regulators acknowledge that some policy terms are likely to change to the detriment of consumers.

"People did have a deal with Executive Life beforehand--a deal that was, to some extent, too good to be true," said Deputy Insurance Commissioner Tom Epstein. "Some adjustments had to be made to make these agreements more in line with the marketplace."

However, regulators say the MAAF sale is attractive because it sets minimum standards for the buying group. Additionally, they note that profit-sharing arrangements in the deal could net consumers far more than the minimum projections that some agents are using in their examples.

Regulators are soliciting additional bids in an attempt to get more for policyholders.

But they maintain that consumers are far better sticking with the rehabilitation plan than bailing out. Those who drop out before the end of the five-year rehabilitation could lose 40% of the cash value of their policies, according to the plan. In addition, they would end up paying a plethora of up-front fees and commissions to buy a new policy, industry experts note.

"To tell somebody to opt out today, I think, is doing a terrible disservice to policyholders," said Richard Baum, chief deputy commissioner for operations at the California Department of Insurance.

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